It is a universal sigh of traffic participants on congested streets: where do all those cars come from? Across the Gulf region, the answer increasingly is, from East Asia via Dubai. Whether it is a used Hyundai cruising the streets of Qatar’s capital Doha or an almost new Nissan in Benghazi, Baghdad, or Isfahan, chances are that the vehicle was shipped through Dubai.
In the UAE’s economic boom of late, passenger cars have been swept into the country in a rising stream with compound annual growth rates of 30% from 2001 to 2005, documented by the thickening traffic in the country’s major population centers that led most recently to the introduction of road tolls on Dubai’s main artery.
But the even more interesting story from regional perspective is that Dubai has become a trade hub for cars, with annual growth rates of vehicle re-exports exceeding growth of car imports. A recent study by the Dubai Chamber of Commerce and Industry (DCCI) examined this trend as it developed from 2001 to 2005.
Although vague on details and lacking 2006 figures, the study showed a strong definite shrinking share of domestic consumption in all of Dubai’s vehicle imports. Local termination of vehicle trade contracted from 85% in 2001 to 66% in 2005, meaning that by the end of the period one in three cars shipped to Dubai, was re-exported.
The market research firm Business Monitor International estimates Dubai re-exported around 70,800 vehicles in 2006 with a forecasted 80,000 set to ship out in 2007.
According to statistics by US-based research firm Global Insight, the emirate’s main vehicular trade flow originates in Japan but Korean-made cars and vehicles assembled in Australia also contribute significantly to annual car and truck imports. Main markets for re-exports include Qatar, Iran, Iraq, and Afghanistan but also Libya, the DCCI said.
In overall merchandise trade, Dubai is the world’s third largest re-exporter behind Hong Kong and Singapore by import to re-export ratios. While part of this performance, the emirate’s regional car trade is until now not more than a good footnote in the global automotive trade which the World Trade Organization assessed at $914 billion in 2005.
But Dubai’s growth in this trade fits with the shift of automotive trade into emerging markets and the importance of staying alert to new trade patterns. This is a country that has next to no automotive production, yet exports of vehicles and motorcycles made up 9% of total exports in 2005.
Light vehicle sales highest in the world
The market prospects for automotive sales are enormous in the region that is serviced by Dubai as trade hub. With a total increase of close to 120% between 2001 and 2006, the growth rate for sales of light vehicles in the Middle East were higher than anywhere else in the world for that period, followed by those in Africa, industry analyst Stephanie Vigier from Global Insight told Executive via e-mail. In the coming five-year period to 2011, the research firm forecasts that the region’s growth rate for car sales will remain above world averages and rank third globally.
In regional statistics for the six GCC countries, the UAE automotive sector ranks second in size behind Saudi Arabia. Foreign trade within the UAE automotive sector — including trade in vehicles, parts, accessories and motorcycles — hit $6.6 billion in 2005, said the DCCI report. With over 2,660 companies at the end of last February, the automotive sector employed 4,127 people and earned combined net profits of $1.5 billion.
The Gulf states’ mix of high population increases from labor migration and high population growth powers the demand — which, however, could even be higher if social and legal parameters were different. Namely, the gender inequality that prohibits women from taking the wheel on Saudi streets has the kingdom see a massive number of potential drivers coming of age each year without having the opportunity to operate a vehicle.
Owing to Saudi Arabia’s incessant population growth, the pool of eager new motorists still holds about 95,000 young men who reach driving age each year, estimated the kingdom’s National Commercial Bank in a recent review of the Saudi automotive market. NCB characterized it as the Middle East’s largest with a value of $11 billion and a volume of 650,000 cars and trucks in 2006. For comparison: new vehicle sales for 2006 in the UAE totaled close to 190,000 and are expected to exceed 200,000 units in 2007, Global Insight said.
The domestic used car markets in the UAE and Saudi Arabia are said to be minor, amounting to around 15% of annual car and truck sales in Saudi Arabia. In the UAE, used car purchases since 2003 have remained below the threshold of 50,000 units per year.
However, the Japan Auto Appraisal Institute, a group that values used cars from Japan, said that 200,000 units in 2005 were exported to Dubai from the island nation in 2005, — making it the second largest destination of used Japanese cars behind New Zealand. These numbers from the Japanese car industry suggest that the size of used car shipments to Dubai is much higher than given in local statistics, which would indicate both understated vehicle trade figures from UAE sources and an even larger hub function for the country.
Factors that support Dubai’s rise as regional trade hub include free trade agreements with countries outside of the GCC as well as the emirate’s physical and legal infrastructure ranging from its massive port and free zone established since the 1970s to the creation of the free-trade Dubai Cars and Automotive Zone for the sole purpose of re-exporting used cars in the year 2000.
In a two-birds-one-stone move car makers are able to feed multiple markets from one spot. In an illustration to the international trade’s valuation of the hub’s growing role, Dubai’s Port Rashid last autumn was a port of call on the maiden voyage of the world’s largest car carrier, a specially enlarged and refitted mammoth cargo vessel with capacity for transporting a shade under 8,000 trucks and cars.
Spare parts market is on the rise
Recent developments in the new car market may further boost re-exports. UAE residents began losing their appetites for new car purchases in 2006 — sales growth fell nearly by half to 23% in 2006 from the 42% seen in 2005, based on BMI figures. Growth is expected to slow further to between 13 and 15% in 2007.
The dip is attributed to increasing costs of living, with rents some of the highest in the world, more widespread use of public transportation and higher levels of foreign workers sending wages back to home countries, managers at UAE car dealerships recently told local media. The implication is an even greater importance of re-exports.
In addition to outbound vehicle trade, Dubai spots a flourishing re-export of spare parts and accessories. The aftermarket industry in Dubai — buying and selling of any parts or accessories not originally part of the car — is very popular, Vigier said.
Like almost everywhere else in the world, people in the region like to modify their cars — adding flashier rims, louder exhaust, spoilers, etc. This is also helping boost the re-export of spare parts from Dubai, she explained. Finally, “the demand for spare parts is high due to the increasing number of road accidents, which is a serious problem in the region.”
The UAE has very small production capacities for spare parts; again allocating most of the country’s trade in automotive parts to re-exports. A serious commercial problem for international brand manufacturers in this business is counterfeits.
Production capacity
The market outlook for the automotive trade in the Middle East and Africa suggests that imports — and, in case of Dubai, re-exports — will supply the mainstream of both new and used vehicles for many years to come. In all of the Middle East and Africa, car assembly and manufacturing capacities amount to about 2.5 million units per year in 2006 and 3 million units in 2010, poised to representing not more than 3.3% out of the global manufacturing capacity of 90 million units in 2010, according to the automotive institute of PriceWaterhouseCoopers.
These production capacities are and will be concentrated in Iran, followed by Egypt. They comprise joint ventures with big-name manufacturers but also Iran’s own Khodro Industrial Group which has an annual output capacity of more than 550,000 cars, trucks, buses, minibuses and vans using licensed technology, own designs, and partnerships with Japanese and European — and more recently also Chinese and Indian — car makers. In March, the Iranian company opened a production plant in Syria that manufactures the “Sham” line of Khodro’s Samand sedan.
In GCC countries, ownership of exclusive auto firms has found its lovers as proven by the large financial investments of Kuwait’s Investment Dar and Adeem in the aristocratic British marque Aston Martin this spring. But these are investments abroad; production and customization of cars in the GCC is for the current time limited to micro-ventures like one by a German luxury sports-car workshop, RUF Automobile GmbH, in Bahrain that aims to produce vehicles strictly for a tiny circle of collectors and sports-car enthusiasts.
What can be expected is that the demand for luxury and international brand-name cars in new car markets and the demand for used East Asian models by buyers will supply Dubai with years of business as import and re-export hub for automotive trade.
